Section 194T has been introduced to ensure tax deduction at source on certain payments made by firms to their partners. Previously, there was no requirement to deduct TDS on payments such as salary, interest, commission, bonus, or remuneration to partners. The Finance (No. 2) Act, 2024, introduced Section 194T to close this gap and make such payments subject to TDS if they exceed a certain threshold in a financial year.
Judicial Background Beforeection 194T
Before the enactment of Section 194T, the courts held that payments made by firms to their partners in the form of salary, bonus, commission, or remuneration were not liable to TDS. This interpretation stemmed from a combination of judicial precedents and the nature of partnership firms as pass-through entities. For example, in the case of ACIT v. Dhar Construction Company, it was concluded that any such payments fell under the umbrella term of remuneration as defined in section 40(b)(i). The court emphasized that commission paid to partners, if authorized by the partnership deed, could not be subjected to tax deduction under section 194H, which deals with commission and brokerage in general business dealings.
Furthermore, Explanation 2 to Section 15 of the Act clarified that salary, bonus, commission, remuneration, etc., received by a partner from the firm is not to be treated as “salary” for income tax purposes. Consequently, Section 192, which governs TDS on salaries, was also deemed inapplicable in the context of payments from a firm to its partners. As a result, partnership firms had no legal obligation to deduct TDS on such payments, creating a situation that the Finance (No. 2) Act, 2024 sought to rectify.
Legislative Introduction and Effective Date
To override the prevailing judicial interpretation, the Finance (No. 2) Act, 20,24 inserted Section 194T into the Income-tax Act. This section mandates that any payment made by a firm to its partner instead of salary remunerationn, commission, bonus, or interest is subject to TDS if the aggregate amount exceeds twenty thousand rupees in a financial year. The applicable rate of TDS is 10 percent.
This provision comes into effect on 1st April 2025 and applies to payments credited or paid on or after that date. It is important to note that the section is effective from 1st April 2025 and not from the assessment year 2025-26. Therefore, for the financial year 2024-25, no deduction under Section 194T is required, and tax auditors need not report non-deduction under Clause 34 or Clause 21(b) of Form No. 3CD for the assessment year 2025-26.
Conditions Triggering TDS under Section 194T
Section 194T lays down specific conditions under which TDS must be deducted. Firstly, the payment must be made by a firm to its partner. Secondly, the nature of payment should fall within the categories of salary, remuneration, commission, bonus, or interest. Thirdly, the payment must be made or credited on or after 1st April 2025. Fourthly, the total payment during the financial year must exceed twenty thousand rupees. Lastly, TDS must be deducted at the rate of 10 percent at the time of credit or payment, whichever is earlier.
If the amount paid or credited does not exceed the twenty-thousand-rupee threshold in the financial year, no TDS is required under Section 194T. The section does not provide any leeway for exemption certificates or declarations from partners. If the partner fails to furnish PAN or Aadhaar, the TDS rate shall be 20 percent.
Scope of the Term “Firm”
The obligation to deduct TDS under Section 194T lies with the “firm.” Section 2(23) of the Income-tax Act defines a firm as having the meaning assigned to it in the Indian Partnership Act, 1932. It also includes limited liability partnerships as defined in the Limited Liability Partnership Act, 2008. Thus, both traditional partnership firms and Indian LLPs fall within the ambit of this section.
This definition makes it clear that a foreign LLP, i.e., a limited liability partnership incorporated outside India, does not qualify as a “firm” under section 2(23). Consequently, foreign LLPs are not required to comply with the provisions of Section 194T.
Additionally, Section 194T is applicable to firms regardless of whether they are assessed as a partnership firm or as an association of persons (AOP) under Section 184 of the Income-tax Act. This is significant because certain traditional partnership firms may be assessed as AOPs if they are not supported by a written partnership deed or if the profit-sharing ratios are not specified in writing. However, since LLPs are statutorily required to have a written agreement, this distinction is generally irrelevant to them.
Applicability to Indian LLPs and Exclusion of Foreign LLPs
Indian LLPs registered under the LLP Act, 2008 are specifically included within the scope of the term “firm” for purposes of Section 194T. As per Section 2(1)(n) of the LLP Act, LLP means a partnership formed and registered under that Act. Hence, foreign LLPs that are not registered under Indian law do not qualify as “firms” under Section 2(23) and are therefore excluded from the applicability of Section 194T.
This exclusion has practical implications. Any remuneration or interest paid by a foreign LLP to its partners, even if they are Indian residents, will not be subjected to TDS under Section 194T. The burden of tax compliance in such cases lies with the partner receiving the income, and not with the LLP making the payment.
Who Qualifies as a Partner for Section 194T
The term “partner” is defined under Section 2(23)(ii) of the Income-tax Act. It adopts the meaning from the Indian Partnership Act, 1932, and also includes any person who, being a minor, has been admitted to the benefits of partnership. Furthermore, it includes a partner of an LLP as defined in the LLP Act, 2008.
This expansive definition ensures that even if a minor is admitted to the benefits of a partnership, any payments such as interest or remuneration made to such a minor will attract TDS under Section 194T. Likewise, partners of LLPs are also covered.
Relevance of Working and Non-working Partner Distinction
Under Section 40(b) of the Income-tax Act, there is a clear distinction between working and non-working partners, especially for the purpose of allowing deductions to the firm. Remuneration paid to working partners is deductible, subject to certain limits, while no such deduction is allowed in respect of non-working partners.
However, this distinction is irrelevant for TDS under Section 194T. The obligation to deduct TDS applies uniformly to all payments covered under this section, regardless of whether the partner is working or non-working. Similarly, it does not matter whether the interest or remuneration paid qualifies for deduction under Section 40(b) or is disallowed. The only consideration is whether the payment falls within the specified categories and exceeds the threshold.
Nature of Payments Attracting TDS under Section 194T
The payments that attract TDS under Section 194T are explicitly listed. These include salary, remuneration, commission, bonus, and interest. It is important to understand that these payments may be made in various forms and credited to different accounts. Even if these payments are credited to the partner’s capital account, they will still be subject to TDS.
These amounts don’t need to be recorded as expenses in the profit and loss account of the firm. Even internal book entries or capital account credits made to acknowledge such payments can attract TDS under this section. This broad scope ensures that tax is not evaded merely by structuring the payment as a capital adjustment rather than an expense.
Timing of TDS Deduction
Section 194T mandates that TDS be deducted either at the time of crediting the payment to the partner’s account or at the time of actual payment, whichever is earlier. This is consistent with the general principle followed in most TDS provisions of the Income-tax Act.
Firms must be vigilant regarding the timing of these entries. For example, if a firm passes a journal entry on 31st March 2025 to credit remuneration to a partner, it will not attract TDS under Section 194T since the section becomes effective only from 1st April 2025. However, any such entry or actual payment made on or after 1st April 2025 will require deduction of tax at source if it meets the other conditions of the section.
Threshold Limit for TDS Deduction
Section 194T provides a threshold limit of twenty thousand rupees. If the aggregate of all payments made to a partner during the financial year does not exceed this limit, TDS need not be deducted. The key aspect here is aggregation. The threshold is not applied separately for salary, bonus, commission, remuneration, and interest. Instead, the total of all such payments made to a partner during the year must be considered to determine whether the threshold has been breached.
This aggregated approach helps avoid misuse of the threshold by fragmenting payments under different heads. Also, any payment or credit made before 1st April 2025 is excluded from calculating this threshold. This interpretation is in line with the CBDT’s earlier clarifications under similar provisions like Section 194Q, where transactions that took place before the effective date of the provision were held to be outside its purview.
Interpretation by the Revenue Department
The introduction of Section 194T has changed how firms and LLPs are expected to handle payments to their partners. The Revenue Department interprets this section strictly, as it aims to expand the scope of TDS and ensure early tax collection on income streams that previously went untaxed at the payment stage.
From the department’s perspective, the tax deduction under Section 194T applies to any credit or payment that is in substance a reward or return to the partner for services or capital contribution. Whether or not the firm records these amounts as expenses is irrelevant. Even if such amounts are credited directly to the partner’s capital account or current account, TDS under Section 194T must be deducted if the payment is like remuneration, interest, commission, or salary.
To prevent avoidance, the Revenue may also examine the nature of payments disguised as other transactions but which, in essence, constitute partner compensation. For instance, if a firm makes a payment and records it as reimbursement or loan repayment but it actually compensates a partner’s effort or capital, the department may invoke Section 194T and raise a demand for non-deduction of tax.
Judicial Interpretation of Disguised Partner Payments
Judicial authorities have already dealt with several cases involving disguised payments to partners, especially under Section 40(b), which governs allowability of such expenses to the firm. For example, in the case of Rashik Lal & Co. v. CIT, the Supreme Court held that a payment of commission to a partner, even if made in the name of an individual capacity, is not allowable as a business expense if the recipient is a partner in the firm.
This principle is relevant to Section 194T because firms may attempt to escape TDS by making payments to entities or accounts controlled by partners, under the guise of individual services. However, the identity of the partner and the capacity in which they receive payment are likely to be closely scrutinized by tax authorities. If the income ultimately belongs to a partner and is like salary, interest, or commission, Section 194T will apply.
Interplay with Section 40(b)
Section 40(b) disallows certain payments to partners unless they are authorized by the partnership deed and are within specified limits. For example, interest paid to a partner is deductible only up to 12 percent per annum, and remuneration is deductible only if paid to working partners and as per prescribed limits.
Even if a payment is disallowed under Section 40(b) while computing the firm’s taxable income, it may still attract TDS under Section 194T. The two provisions serve different purposes—Section 40(b) is about determining the deductibility of the expense in the firm’s books, whereas Section 194T deals with tax collection at source on income paid to partners.
Therefore, if a firm pays interest at 15 percent to a partner, the excess 3 percent will be disallowed under Section 40(b), but the entire 15 percent is still subject to TDS under Section 194T. The disallowance under Section 40(b) does not exempt the firm from its obligation to deduct tax on the gross amount credited or paid.
Relevance for Tax Auditors and Clause 34 Reporting
Clause 34 of Form 3CD, which is part of the tax audit report, requires the auditor to report the details of TDS deducted and deposited under various sections. With the introduction of Section 194T, tax auditors will have to examine whether TDS has been properly deducted and deposited on payments made to partners in the nature of salary, commission, bonus, remuneration, or interest.
If a firm has failed to deduct tax under this section, the auditor must report the same in Clause 34(c) along with the amount of tax not deducted or short deducted. Further, Clause 21(b) requires the auditor to report inadmissible expenses under Section 40(a)(ia), which deals with disallowance due to failure to deduct or deposit TDS. Hence, if TDS under Section 194T is not complied with, not only is the tax exposure increased, but the firm may also face disallowance of the corresponding expenditure.
Penal Provisions for Non-compliance
If a firm fails to deduct tax under Section 194T or, having deducted, fails to deposit it with the government, it will be treated as an “assessee in default” under Section 201. This exposes the firm to several consequences:
- Interest: Under Section 201(1A), interest at 1% per month is charged from the date the tax was deductible to the date it is deducted. Further, interest at 1.5% per month is charged from the date of deduction to the date of payment to the government.
- Penalty: Under Section 271C, a penalty equal to the amount of tax not deducted or paid can be levied.
- Disallowance of expense: As per Section 40(a)(ia), 30% of the expenditure on which tax was deductible but not deducted or not paid on time will be disallowed while computing the firm’s income.
- Prosecution: Under Section 276B, failure to deposit TDS can result in rigorous imprisonment of not less than 3 months and up to 7 years, along with a fine.
These consequences highlight the importance of complying with TDS obligations under Section 194T and maintaining proper documentation and timing of deductions and deposits.
Practical Challenges and Industry Feedback
Since Section 194T is new and applies from 1st April 2025, firms and LLPs may face certain operational difficulties in the initial phase. Many firms used to credit remuneration and interest to partners in the capital account without deducting TDS. They must now reconfigure their accounting systems to identify and monitor such credits for TDS compliance.
Moreover, many firms may credit the partner’s share of profit, remuneration, and interest in a combined entry, making it difficult to segregate amounts subject to TDS. Under Section 10(2A) of the Act, the share of profit is exempt in the partner’s hands and does not attract TDS. But salary, interest, and commission are taxable and now require deduction under Section 194T.
Firms will need to develop or update software and internal controls to capture and report these components accurately. Additionally, since the section applies prospectively, firms may find it challenging to adjust their existing partnership agreements or remuneration models quickly.
Best Practices for Compliance
To ensure compliance with Section 194T, firms and LLPs should consider the following best practices:
- Review Partnership Deeds: Ensure that payments like interest, salary, and remuneration are clearly authorized by the deed and terms are well defined.
- Segregate Payments: Maintain clear books of accounts that distinguish between exempt share of profit and taxable payments like remuneration and interest.
- Threshold Monitoring: Track cumulative payments to each partner throughout the financial year to determine whether the ₹20,000 threshold has been crossed.
- Timely TDS Deduction: Deduct tax either on payment or on credit, whichever is earlier, and deposit it before the due date under Section 200(1).
- File TDS Returns Accurately: Report deductions under Section 194T in the quarterly TDS returns (Form 26Q) and issue TDS certificates (Form 16A) to partners on time.
- Educate Partners: Inform partners about the new compliance requirements and the implications of failing to provide PAN or Aadhaar.
- Maintain Audit Trail: Keep records of calculations, partnership deeds, payment vouchers, and TDS working papers to defend compliance during scrutiny or audit.
Applicability to Other Business Structures
Section 194T applies only to payments made by a firm or LLP to its partners. It does not apply to:
- Companies making payments to directors or shareholders.
- Proprietorships paying salaries to family members.
- Association of persons (AOPs) not governed under partnership or LLP laws.
For companies, the relevant TDS provisions would be Section 192 (for salary) or Section 194J (for professional fees). Thus, the scope of Section 194T is confined to the firm-partner relationship as defined under Indian law.
Clarification on Share of Profit to Partners
A crucial clarification issued by the government and also embedded in the law is that the share of profit allocated to a partner from a firm or LLP is not subject to TDS. This is because such income is exempt in the hands of the partner under Section 10(2A) of the Act.
Even if the amount credited includes both the share of profit and remuneration or interest, only the latter components attract TDS. It is therefore vital for accounting teams to separate these amounts and apply TDS only on the taxable components.
Practical Illustrations Under Section 194T
To understand the real-world application of Section 194T, it’s helpful to consider several practical examples.
Illustration 1: Interest to Partner Below Threshold
Facts: A firm pays ₹18,000 as interest to a partner during FY 2025–26.
Analysis: Since the total interest paid is below ₹20,000, the firm is not required to deduct TDS under Section 194T. The exemption applies because the aggregate of such specified payments to the partner does not exceed the threshold.
Illustration 2: Salary and Interest Above Threshold
Facts: A firm pays ₹25,000 in salary and ₹15,000 as interest to a partner in FY 2025–26.
Analysis: Total specified payments = ₹40,000, which exceeds the ₹20,000 threshold. Therefore, TDS at 10% must be deducted on the full ₹40,000, not just on the amount exceeding ₹20,000.
Illustration 3: Payment Split Before and After Effective Date
Facts: The firm credited ₹15,000 to a partner’s account on 30 March 2025 and ₹10,000 on 10 April 2025.
Analysis: The ₹15,000 credited before 1 April 2025 is outside the scope of Section 194T. However, since ₹10,000 is credited on or after 1 April 2025, and the aggregate of specified payments during the financial year exceeds ₹20,000, TDS applies only to the amount credited after the effective date. Therefore, 10% TDS must be deducted from ₹10,000.
Illustration 4: No PAN Provided by Partner
Facts: A firm pays ₹30,000 to a partner as remuneration. The partner has not provided PAN.
Analysis: Under Section 206AA, if PAN is not provided, TDS must be deducted at 20%. Therefore, the firm must deduct ₹6,000 as TDS (i.e., 20% of ₹30,000) instead of the regular 10%.
Illustration 5: Combined Entry of Share of Profit and Interest
Facts: A firm credits ₹2,00,000 to a partner’s capital account, which includes ₹1,80,000 as a share of profit (exempt) and ₹20,000 as interest.
Analysis: Only the ₹20,000 interest component is subject to Section 194T. Since it meets the threshold, TDS at 10% must be deducted on ₹20,000.
Impact on Partner’s Taxation
TDS under Section 194T is a mechanism for tax collection and does not affect the taxability of the income itself. The partner receiving the payment must still report the remuneration, interest, or commission as business income under the head “Profits and Gains of Business or Profession.” This income must be disclosed even if TDS has been deducted and deposited.
The TDS certificate (Form 16A) issued by the firm will help the partner claim credit for the tax deducted. Any excess TDS deducted may be claimed as a refund in the partner’s individual income tax return.
Importantly, the share of profit credited to a partner is exempt under Section 10(2A) and not includible in taxable income, and hence not subject to TDS.
Effect on Tax Planning for Firms and Partners
With the introduction of Section 194T, firms and LLPs will need to revise their tax planning strategies, particularly regarding the structuring of partner payments. Earlier, firms had the flexibility to avoid TDS obligations by paying partners in forms that were outside the scope of the TDS provisions. Now, the net is cast wider.
Some specific planning considerations include:
- Review of Partnership Deed: Clearly state and distinguish between share of profit, remuneration, and interest to avoid unintended TDS compliance failures.
- Avoid Arbitrary Payments: All payments to partners should have a legal basis in the deed to avoid disputes and tax disallowances.
- Timing of Credit and Payment: Timing becomes crucial. Payments made before 1 April 2025 are not subject to TDS, so managing timing in the transition year can reduce immediate compliance burdens.
- Capital Account Adjustments: Even if remuneration or interest is adjusted through capital accounts, it will still attract TDS. Planning through capital structuring alone is no longer effective.
- Partner Residency Status: Payments to non-resident partners may fall under different provisions,, such as Section 195. Hence, partner residency should be verified.
- Maintenance of PAN and KYC: TDS under Section 206AA at a higher rate for partners without PAN creates a strong incentive for maintaining complete partner KYC records.
Clarification on Applicability to Minor Partners
Section 2(23) of the Income-tax Act includes minors admitted to the benefits of a partnership within the meaning of “partner.” Hence, if interest or remuneration is paid to a minor admitted for the benefit of a partnership, TDS under Section 194T is applicable if the payment exceeds the threshold.
In such cases, the PAN of the minor must also be furnished, failing which TDS at 20% would be attracted under Section 206AA. If the minor does not have a PAN, the guardian may obtain one on behalf of the minor to prevent a higher tax deduction.
Accounting Implications
Firms must revise their accounting policies to ensure proper implementation of Section 194T. Some key steps include:
- Segregating and classifying payments to partners.
- Automating TDS deduction logic in accounting software.
- Creating separate ledgers or heads for taxable payments to partners.
- Linking partner accounts with PAN for seamless reporting in TDS returns.
- Reconciling Form 26Q (quarterly TDS return) with the firm’s books before filing.
Errors in classification or threshold calculation could result in under-deduction or non-deduction, leading to penal consequences.
Role of Chartered Accountants and Tax Auditors
Professionals conducting tax audits under Section 44AB must be vigilant when reporting compliance with Section 194T. Key responsibilities include:
- Verifying whether TDS has been deducted and deposited where applicable.
- Checking whether PANs have been collected from all partners.
- Ensuring proper classification of share of profit (exempt) and remuneration/interest (taxable).
- Highlighting non-compliance in Clause 34(c) of Form 3CD.
- Reporting disallowances under Clause 21(b) for TDS default under Section 40(a)(ia).
In case of transitional issues during the first year of implementation (FY 2025–26), auditors may also need to advise clients on practical adjustments and documentation to ensure ongoing compliance.
Treatment in Cash-Based Accounting
Some smaller partnership firms may follow cash accounting instead of accrual accounting. In such cases, the timing of deduction under Section 194T shifts to the date of actual payment, rather than credit. However, the nature of the payment remains the same.
Regardless of accounting method, once a taxable payment is made to a partner after 1 April 2025, TDS must be deducted if the aggregate payments during the year cross ₹20,000.
Response from Taxpayer Community
Initial reactions from firms, LLPs, and tax professionals have been mixed. While many acknowledge the intent to plug revenue leakages and bring parity with other TDS provisions, concerns have been raised about:
- Increased compliance burden for small firms.
- Difficulty in segregating the share of profit and remuneration.
- No option for a lower deduction certificate or self-declaration by the recipient.
- Higher deduction for non-PAN partners even in closely held firms.
Industry bodies may seek clarifications or relief through representations to the CBDT, especially about quarterly compliance requirements and retrospective consequences.
Payments on Retirement, Resignation, or Exit of a Partner
One practical situation requiring attention under Section 194T is when a partner retires or exits the firm and receives lump sum payments that include accumulated interest, salary, or other dues. In such cases, it is critical to evaluate whether these payments represent components covered under Section 194T or are merely a return of capital.
Scenario 1: Final Remuneration and Interest
If the outgoing partner is paid remuneration or interest accrued before the exit, and such payment is made on or after 1 April 2025, it will attract TDS if the total payments during the financial year exceed ₹20,000. The firm must deduct tax at 10% on these components, regardless of the partner’s exit.
Scenario 2: Capital Settlement
If the payment is a return of capital or share of revalued assets or goodwill, it will not attract TDS under Section 194T. However, if the amount is structured to include disguised interest or remuneration, the tax authorities may recharacterize such amounts and demand TDS accordingly.
Therefore, firms should maintain clear documentation separating capital return from taxable remuneration or interest when settling a partner’s account upon exit.
TDS on Payments Made After Dissolution of Firm
Section 194T does not specifically address situations where a firm is dissolved, and payments are made to partners afterward. Theoretically, the firm ceases to exist upon dissolution, and hence cannot act as a “deductor.”
However, if the dissolution results in delayed payment of dues like remuneration or interest that relate to periods before 1 April 2025, no TDS will be applicable. But if these payments are made after 1 April 2025 and relate to periods thereafter, it becomes a gray area. Legal interpretation would likely suggest that if the entity paying such amounts still functions in some capacity, or if the business is reconstituted, the successor firm may be held responsible for deducting tax.
In practice, firms should attempt to settle all dues before formal dissolution to avoid post-dissolution complications regarding TDS compliance.
Remuneration to Partners Who Are Foreign Residents
Payments of remuneration, interest, or commission to a partner who is a non-resident do not fall under Section 194T. Instead, such payments must be examined under Section 195, which governs TDS on payments to non-residents.
Section 195 requires the firm to deduct tax at applicable rates under the Income-tax Act or as per the relevant Double Taxation Avoidance Agreement (DTAA), whichever is more beneficial to the recipient. In these cases, the firm may need to obtain a certificate under Section 195(2) or approach the Assessing Officer for determining the tax applicability if there is ambiguity.
This distinction is critical, and firms must establish the residency status of their partners at the start of each financial year to ensure proper section-wise compliance.
Retrospective Payments for Past Financial Years
If a firm makes a payment in FY 2025–26 that pertains to earlier years, say, unpaid remuneration or interest from FY 2023–24 or 2024–25, should it deduct TDS under Section 194T?
As per established principles and CBDT circulars under other TDS provisions, tax is deducted based on the date of payment or credit, not the period to which the payment relates. Hence, even if the arrears pertain to past years, if the payment is made on or after 1 April 2025, and if the total of such payments crosses ₹20,000, then TDS under Section 194T becomes applicable.
This highlights the need to carefully evaluate back payments and ensure that tax obligations are met even for prior period dues paid after 1 April 2025.
CBDT Clarifications and Circulars (Expected)
As Section 194T is new and its scope intersects with earlier judicial interpretations and existing provisions like Section 40(b), industry stakeholders expect the Central Board of Direct Taxes (CBDT) to issue clarifications on several matters, including:
- Whether TDS is required on payments made through capital account adjustments.
- Guidance on calculating the ₹20,000 threshold (e.g., cumulative across branches).
- Treatment of joint partners or HUFs represented by a single partner.
- Handling payments to minors or deceased partners’ estates.
- Treatment of payments by foreign firms or LLPs to Indian partners.
While no such circulars had been issued as of this writing, the CBDT typically issues FAQs or press releases soon after significant new sections come into effect. Firms and professionals must stay alert for such clarifications and update their compliance practices accordingly.
Filing of TDS Returns and Form 26Q
For all TDS deducted under Section 194T, firms must file quarterly TDS returns in Form 26Q. The section code for 194T will be specified by the income tax e-filing portal. Details such as PAN, amount paid, tax deducted, and date of deduction must be accurately recorded.
Due dates for filing Form 26Q are:
- Q1 (Apr–Jun): 31st July
- Q2 (Jul–Sep): 31st October
- Q3 (Oct–Dec): 31st January
- Q4 (Jan–Mar): 31st May
Late filing attracts a fee under Section 234E and penalties under Section 271H.
Issuance of TDS Certificates (Form 16A)
Firms must issue Form 16A to partners for TDS deducted under Section 194T. This certificate should be generated through the TRACES portal and delivered to the partner within 15 days from the due date of filing the TDS return.
These certificates are necessary for the partner to claim credit for the tax deducted while filing their personal or business income tax return.
Technical and Transitional Adjustments
As with any new provision, Section 194T may result in transitional challenges for firms:
- Accounting Software Configuration: Many accounting platforms will need updates to identify payments to partners and trigger TDS at appropriate thresholds.
- Training and Awareness: Finance teams, especially in smaller firms, will need training on how to distinguish between exempt and taxable payments and track partner-wise totals.
- Updating Deeds: Some firms may revise their partnership deeds to reflect clearer clauses for remuneration, especially in terms of timing and basis of payments.
- Managing Cash Flow: Since TDS is to be deducted even if payments are made via capital adjustments, this may impact net withdrawals by partners, who will receive lower payouts due to tax withholding.
Conclusion
Section 194T introduces a significant change in the way payments to partners by a partnership firm or LLP are taxed. With the requirement to deduct tax at source on payments such as salary, remuneration, commission, or any other compensation, the compliance burden on firms has increased. While partners have always been taxed individually on such income, the shift to TDS deductibility aligns with the broader government effort to expand and streamline the tax base.
Firms must now maintain proper documentation, monitor thresholds, and ensure timely deposit of TDS to avoid penalties. At the same time, partners receiving these payments must accurately report the income in their returns and claim the TDS credit appropriately.
Firms and partners should consult with tax professionals to ensure correct interpretation and application of Section 194T, especially in the initial years of its implementation. By doing so, they can mitigate compliance risks and maintain seamless tax reporting. As with any new provision, clarity may evolve through CBDT circulars, notifications, or judicial pronouncements, making it essential to stay updated.